Title: 7 Trends Impacting Retail Payments: Sorting out a Complex and Competitive Environment
Abstract: [ILLUSTRATION OMITTED] The payments industry has all three attributes of a highly attractive market: It's large, it's growing, and it's profitable. The global payments market is expected to double in the next decade. And because of the structural nature of the business, which includes relatively stable and predictable transaction volumes combined with low capital intensity, the industry is very profitable. But that does not mean everything is rosy. North America's $180 billion payments market is mature, consolidated, competitive, and under attack. Since the global recession, tepid economic growth has caused financial institutions to shift focus to risk-adjusted capital returns and has prompted consumers to de-leverage, creating a set of underserved segments. Increased regulation combined with the zero cost of money has decreased interest rate spread and lowered margins, elevating the importance of fee-based and account-based income and forcing players to look for new revenue streams. Multiple monoline payments players have been absorbed into larger financial institutions or have expanded their service offering into a broader set of financial services. Merchants continue to consolidate market share, simultaneously increasing the competition for cobranded cards and programs and increasing the adversarial relationship between merchants and financial institutions. Leading payments players are now refocusing on topline revenue growth and reexamining their value proposition. What does the future hold in this incredibly complex environment? Our research indicates seven key trends will significantly reshape the payments industry in the next three to five years. 1. Increased card stickiness. Platforms that enable purchases with stored card credentials, such as Amazon, Uber, and iTunes, will establish card switching costs, co-opt card brands, and relegate payments to a function. Consumers rarely remember which credit card they registered in their accounts, and rarely see the card brand during online checkout. And just as bill-pay makes checking accounts sticky, cards linked to multiple platforms will have a stickiness that increases switching costs for consumers considering a new card. Issuers would be wise to create incentives to put their cards at the top of the platform wallet. The recent partnership between American Express and Uber is one of many examples of this trend. 2. Interchange fee deflation will continue, and value-add and utility rates will emerge. Merchant credit card fees as a percentage of gross dollar volume of transactions have declined, on average, 2% per year since 2006 as merchants have pursued a lowest-cost-of-payments strategy. Going forward, pressure from the Merchant Customer Exchange, litigation, and other efforts will drive rates down further. Additionally, platforms like PayPal can bundle value-added services, such as in-store marketing, through Bluetooth beacons, tablet checkout, and advertising platforms into transparent rates. Recognizing that future interchange will be driven by merchant value-add, large payment players are taking action to enhance their current value proposition against current interchange rates. For example, Chase's lease of VisaNet creates an end-to-end network in which Chase can create new merchant value propositions and control pricing. Acquirers and issuers that are unable to provide additional merchant value will be relegated to lower rates. 3. Moving to real time. PIN and signature debit, automated clearing house, and wire transactions will converge through real-time infrastructure with pricing based on timing of funds availability, real-time funds guarantees, and associated information flow. Fiserv and Fidelity Information Services are utilizing their respective electronic funds transfer networks to create real-time good funds functionality in areas like billpay and person-to-person payments. …
Publication Year: 2014
Publication Date: 2014-10-01
Language: en
Type: article
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Cited By Count: 1
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